A branch of Vietcombank in Hanoi. The bad debt ratio at the bank rose to 3.47 percent on June 30. Photo: AFP

The alarm that experts have been sounding about Vietnam's bad debt problem has just got shriller.

They are saying the credit market can freeze as the bad debts mount. What is even more worrying, they say, is that most of the bad debts are with big lenders, which means stronger negative impacts on economic development.

Bad debts with Vietnam's third biggest lender, Vietinbank, rose to 2.45 percent of its outstanding loans, or nearly VND7 trillion (US$333.3 million) on June 30 from 0.74 percent, or VND2 trillion on January 1.

Meanwhile, the ratio at the fourth largest lender Vietcombank rose to 3.47 percent, or VND7.5 trillion, from 2.03 percent, or over VND4 trillion, according to bank reports.

Bad debts of the two banks account for more than 70 percent of the total bad debts held by eight banks listed on the stock market.

As of late March, more than half of the total bad debts had come mostly from big banks, local media reports have pointed out recently.

Vietnam's bad debts rose to 8.6 percent of total loans in the banking system at the end of March, as businesses faced many difficulties in a slowing economy. Their value amounted to VND202 trillion, the State Bank of Vietnam said in a recent statement, citing investigative results by its inspectors.

Economist Bui Kien Thanh attributed the large volume of bad debts of the major lenders to large loans given to state-owned firms as required by the government.

Total loans held by state-owned companies reached more than VND1,000 trillion, exceeding their total equity of VND790 trillion, Minister of Planning and Investment Bui Quang Vinh said last month.

Le Tham Duong of the Ho Chi Minh City Banking University offered a slightly different take on the issue: "We can't just look at the absolute numbers and say it is large banks that should be criticized more for their bad debts. Vietinbank and Vietcombank in fact have much lower bad debt levels than those at small banks, if we take into consideration their large total loans and equity."

"Then, in terms of how fast bad debts have been expanding, most banks are the same. This is a real problem, like a blood clot in the banking system," he said.

But Duong noted that bad debts at large banks should be watched more carefully since they have a much larger impact on the economy. "Small banks are usually the ones who light the bomb, but it is large banks that can cause a large explosion."

The central bank's latest bad debt estimate of 8.6 percent was far higher than those it had issued earlier based on commercial banks' figures, which had put the ratio of bad debts to outstanding loans at 4.47 percent at the end of May.

Non-performing loans stood at 3.07 percent at the end of last year, the central bank said in a recent statement.

The reason for the large gap between the central bank inspectorate's figures and banks' data was that lenders tended to report bad debts at a lower ratio, it said.

"Several banks did not comply with the regulations on debt classification, recording non-performing loans below the actual figure to reduce their (bad debt) provisions," it said.

Lenders had set aside VND67.3 trillion ($3.23 billion), or 57.2 percent of the bad debt value, by the end of May, the statement said.

Economist Thanh said some lenders tend to maximize the use of their money for profit, refusing to reserve enough to cover potential losses.

When the real estate market hit a downturn, many property loans turned into bad debts and the value of the collateral fell sharply. Banks should have increased their bad debt provisions then, but they did not, he said. "If they did it, their profits would fall. So they avoided it."

Assessing the ratio of bad debts, economist Thanh said: "It is very high, at alarming level."

No country has such a huge non-performing loan ratio as Vietnam. In most other countries, bad debt ratios are below 1 percent; 2 percent is considered high, he said.

The bad debts mainly come from the industrial and construction sectors, which have been affected badly by the prolonged frozen state of the property market, said an expert, who declined to be named.

Economist Duong said bad debts may increase in the coming months as the economy is yet to show signs of recovery.

More than 30,300 companies closed permanently or suspended operations in the first seven months of the year, up 6.4 percent from a year earlier, according to a statement on the government website on July 31.

Prime Minister Nguyen Tan Dung has ordered a public list of weak banks and details of lenders' non-performing loans as the government seeks to tackle the bad debt problem that experts say is undermining the banking system and hurting businesses.